Sam, I think that the FED's think more in term of "soft landings", namely, when excess develop, they move against the prevailing wind and let imbalances ebb back into balance rather then "crash" into balance. Right now, in the US, there is no immediate need to stimulate demand nor need to increase borrowing (consumers are already "overborrowed" lower interest rates may exacerbate this situation). The domestic economy is in pretty good shape and few quarter of sub par growth would be more what the FED's are after rather then actual negative growth. With such sub par growth, increases in workers' earnings, even if it comes on the "back" of corporate earnings, would tend to improve consumers balance sheet.
The problem the FED's face is a possible financial accident (and to prevent such an accident, they organized the rescue of LTCM, but they did not rescue the investors of LTCM, the investors took a hair cut of 90%), I think that they are keeping the fiscal instruments to counter such a development dry, as long as the tightness does not choke the economy. Right now, it seems to me they are doing quite a credible job in this respect.
The Feds may also be faced with the initial trend of a weakening dollar (due, possibly to our trade deficit growing much too fast) and lowering domestic interest rates would exacerbate this situation as well, so they may wait to the "breaking" point on that, allowing some reignition of the economic engines in Asia before they let our dollar weaken too much. Once they feel that Asia is getting back on its feet, they may slowly act to bring the dollar back down to reduce the trade deficit and get things back into balance.
Zeev |
